We wrote recently about Epocrates, the drug information company that is a rare case of a successful advertising-supported business in the business and professional market. It’s worth mentioning another class of ad-supported business information services, buyers’ guides, which is in a state of transition.
Typified by ThomasNet (fka The Thomas Register), Sweets Network, a part of McGraw Hill Construction, and GlobalSpec, buyers’ guides are compilations of manufacturers’ catalogs – ThomasNet for industrial parts, Sweets for architectural components, and GlobalSpec for a wide range of industrial goods. Many buyers’ guides originated in print as compilations of individual catalogs and were distributed in multi-volume books or binders. Over time, these products have evolved into online collections with more value-added features, such as parametric search, downloadable specification files, and CAD drawings that are useful to those who specify, select, and purchase products or components.
Unlike bona fide reference databases, such as Epocrates, buyers’ guides typically follow the yellow pages business model: vendors pay little or nothing for a minimal listing, but more prominent or detailed listings cost significantly more. In some cases, the buyers’ guide publishers even build mini-catalogs for advertisers. In all cases, lead generation applications are an important feature of buyers’ guides.
Over time, reference databases and buyers’ guides may converge, but there are some notable gaps that must be bridged. Reference databases are usually carefully edited to ensure that information is accurate, normalized, and categorized for searching. Unlike a bona fide reference product like Epocrates, buyers’ guide depend heavily on vendors to submit information about their products, and the publishers exert little if any editorial control, except to normalize products for searching. Unlike Epocrates, which maintains a wall between its editorial operations and advertising sales, buyers’ guides often intentionally meld the two; advertisers’ happiness depends on showing their wares to the best advantage and, ideally, on generating sales leads.
The question of whether reference databases or buyers’ guides will be the winning model ultimately comes down to the situation in which the products are used. The higher level of accuracy and completeness typically found in a reference database may be critical in situations where the information is used directly to drive a transaction that may have life or death consequences. Buyers’ guides, although having less accuracy or completeness, may be good enough in situations where the user is an intermediary in a multi-step purchase process that has checks along the way. In those cases, “good enough” may in fact be good enough.
It’s hard to be big and nimble. But at a time when even Google is looking less nimble, Bloomberg is a counter example. For a big company, Bloomberg has been adept at moving outside of its core financial information business. Over the past few years, Bloomberg has launched new services for sports, government, and legal information. Last month, Bloomberg announced that it would pay nearly a billion dollars to buy the Bureau of National Affairs, a venerable publisher of legal, law, regulatory, and environmental information.
In legal information, the two incumbent behemoths, Westlaw and LexisNexis, neither known for being nimble, have pooh-pooed Bloomberg as naïve in thinking that it can translate its success in financial information to legal information. While the jury is still out (pun intended), Bloomberg’s assembly of legal information to date shows it clearly understands the diversity of information that lawyers need. Furthermore, Bloomberg has a stellar reputation for customer service, something that lawyers are used to getting from Westlaw and LexisNexis.
Bloomberg has lots of money to throw at new ventures, but money alone is far from sufficient for success; many companies have spent huge sums failing at new ventures. Bloomberg has managed to think creatively about problems that involve technology and information, and to identify compelling points of entry. Thirty years ago, Bloomberg started by putting a relatively small set of bond prices online and then expanded, adding more bond data, then equities data, and news. It has proven to be one of the most effective information companies at listening to customers and translating customer need into products at a schedule rarely seen by companies outside of Silicon Valley.
Bloomberg also has a track record of staying the course, unlike many other companies that get feint-hearted when a new business doesn’t immediately live up to expectations. Being nimble may be good, but also being smart, rich, and persistent may be even better.
The book publishing world has been undergoing a big shift. In the beginning, there was Amazon with its world’s largest bookstore. Then came the Kindle, which catapulted Amazon into dominance over e-books. This month, Amazon signed up its first star author, self-help celebrity Timothy Ferris, highlighting Amazon’s aspiration to be a publisher, not just a bookseller. But this story is still unfolding, and Amazon’s dominance is eroding.
Google, Barnes & Noble, Kobo, and Apple have been fighting back in a variety of ways. Their efforts are leveling the playing field and restoring consumer choice. No small part of success comes from Apple’s introduction of an agency model, which gives publishers the right to control pricing as opposed to the traditional wholesale model in which the bookseller can set the price to the consumer. Five of the size largest publishers signed immediately with Apple as have many other publishers. Paradoxically, Amazon’s closed approach insisting that the Kindle would carry only books purchased at Amazon has helped spur competition.
This unfolding story is well-told in the most recent edition of On the Media, one of our favorite shows on public radio. Also on the same show are two other interesting stories. One story covers the possible rise of advertising in e-books through an interview with the CEO of WOWIO, a company that sells discounted e-books with ads. The second story is about the experience of Deborah Read, a would-be novelist who found success publishing with Amazon after many major publishing houses had rejected her works. It’s all worth a listen.
The New York Times recently carried a feature story abut Epocrates, whose free mobile apps for drug dosing and interactions are now used by half of all U.S. doctors, according to the company. Since its founding in 1998, the company has grown to over $100 million in annual revenues. The most significant aspect of Epocrates is that the company has succeeded with an advertising model for a professional market. Over 70 percent of Epocrates’ revenues come from drug company advertising. Users must click through messages and alerts from drug companies before they can access Epocrates’ bona fide drug information. Epocrates says it maintains a strict wall between its content and sales operations.
The success of this advertising model makes it a rarity among professional information services. Even with the advent of free, advertising-supported services across the internet, most reference databases for business and professional users still rely on fees paid by users, either by subscription or some other mechanism. That’s because for most business and professional users, information is the lifeblood of their business and is therefore worth paying for. Increasingly, information is being purchased by institutional buyers, not individual users or company departments. Institutional buyers care more about the quality of information than on getting a bargain (though cost is never out their concern).
Doctors, however, fall into a somewhat special category. First, many operate independently, in part because they are trained to think for themselves and in part because their relationships with patients are one-on-one. This independence is present whether a doctor is in private practice or on staff of a hospital. Doctors are unused to paying for information, much of which (along with professional education) has long been subsidized by drug companies in exchange for advertising, sometimes subtle and sometimes overt. The best example is the Physicians Desk Reference, affectionately known to all doctors as “the PDR,” a compendium of drug information which has been doctors’ traditional go-to source for drug dosing information. Now in its 66th annual edition, the PDR is distributed free of charge to all doctors and is still a fixture in many offices.
Epocrates was one of the first companies to recognize another important reality about doctors: they are mobile workers. Whether working in a private office or a hospital, doctors rarely sit still. Capitalizing on this fact when it was founded, Epocrates offered access to drug databases on Palm Pilots and other early personal digital assistant devices. It was an immediate hit with doctors, and with the drug companies, which willing to pay dearly to reach doctors because of their critical role as gatekeepers to what consumers purchase.
Next time, we’ll talk about a few other information businesses that have been built around the same dynamic.
Breakfast cereal makers learned a long time ago that kids are their consumers, but parents are their buyers. To sell a box of cereal, Kelloggs has to convince kids that the cereal is delicious and convince parents that it is economical and healthy (or at least acceptably unhealthy). Such dual value propositions are increasingly important for information businesses that sell to business and professional customers. To sell successfully to a corporate customer, an information company must satisfy the needs of both end users and buyers, who often have different goals. End users want products that make their jobs easier, perhaps by eliminating steps, errors, or time. By contrast, buyers – in the form of CFOs, CIOs, CEOs, or other senior managers — are typically interested in the needs of a department or enterprise. Buyers frame their goals in terms of reduced cost, reduced risk, improved customer service, or increased revenues. End users don’t always get what they want unless they can demonstrate that it also contributes to departmental or corporate goals. For example, a Bloomberg subscription has long been prized by people on Wall Street, as much for its extensive information as for prestige value. CFOs at financial firms, however, have been trying to reduce costs in recent years and have made end users justify their information expenditures.
The contrast between the goals of end users and buyers has become starker for several reasons. Technology makes information services more broadly accessible thereby raising the visibility of information purchases. Many information companies have repositioned themselves as serving enterprises, rather than just end users. Elevating themselves this way is a legitimate strategy for increasing their value, but also challenges vendors to sell to higher levels beyond the end users, who are typically their traditional internal champions.
Information services are increasingly connected to or embedded in workflows, making it more difficult for end users or even departments to make decisions on their own. For example, in hospitals, as electronic medical records emerge as a core infrastructure component, many other types of information products and services must integrate with them. The selection of a drug database for pharmacists and nurses, for example, may be driven as much by its ability to integrate with the hospital’s electronic medical records as by its inherent content strengths.
Finally, the economic distress has forced many companies to take a much harder look at their expenditures, even those that previously were automatic purchases. For example, faced with client challenges to billing rates, law firms have become more rigorous at running themselves as businesses, including the hiring of professional staffs with procurement expertise. At many firms, the days of a partner getting any tools he or she wants are over.
The lesson for information companies is that they must be armed with compelling value propositions for end users as well as buyers. Winning end user support is necessary but insufficient to close a sale in a corporate environment. Convincing the buyers that the product or service will benefit the company is equally important and sometimes harder to do. No matter how good Fruit Loops taste to a kid, they still have to pass muster with mom or dad.
All business plans are wrong. It’s just a question of how wrong. It’s especially true in rapidly changing markets, such as information services, where the impact of technology is often unforeseen.
Since we sometimes help clients write business plans, this may sound like an awful admission, but it’s true. Business plans are fictions about the future based on a set of assumptions about internal and external factors, such as market demand, competition, product quality, pricing, and costs. While some business plans may be less fictitious than others because of their high level of research and analytical rigor, few business plans turn out to be entirely correct. Even when a business does well, the details of its success usually don’t map to specific scenarios projected in the plan.
Despite these criticisms, business plans do matter. Solid business plans show investors, whether internal or external, that the management team has done its homework and has a disciplined approach to a new business. Done right, a business plan serves as a road map against which management can assess progress once a new business launches and make changes. Rigorous research and analysis, coupled with honest debate, are essential to the original business plan as well as to managing the business after launch.
Like any tool, a business plan should be used correctly. We were recently asked by the board of a large publishing company to review its business plan for an entirely new information business within its existing market space. A few things became clear to us: The internal team that created the plan had done its homework and written a solid plan using reasonable assumptions. However, the board was looking for the plan to be 100% accurate and was not likely to provide any leniency if the business evolved differently (read: more slowly) than projected. This is a recipe for failure, no mater how strong the plan.
From our experience, we have developed three guiding principles for writing and using business plans:
Invest in the Planning Process: Too often clients think of a business plan as a term paper: Just get it done and turn it in. Unfortunately, with business plans, the process of creating the plan is as important as the resulting document. Solid business plans result from objective research and honest debate, which along the way builds buy-in among various stakeholders. This requires an iterative process over an extended time period. We cringe when would-be clients ask us to “write” a business plan because they want to outsource a task that they consider onerous. Consultants like us can organize and drive a business planning process, and can even author credible documents, but doing so without strong internal participation misses much of the value inherent in the planning process itself.
Back the Plan: We’ve seen too many clients adopt a business plan and then fail to invest adequately in it. When a new business fails to go according to plan, management often blames a flawed business plan, rather than a failure to invest in the plan. “Invest” may mean spending enough money on product, marketing, and sales resources, but it may also include making the necessary changes to organization and internal processes.
Be Ready to be Wrong: When the plan turns out to be wrong, respond decisively by making changes, and do so without shame. Managers should be judged not on how accurate their plans turn out to be, but on how effectively they make adjustments to the business after launch. History is full of cases of successful businesses that were the unplanned result of adjustments, sometimes radical, to business plans that turned out to be wrong.
In a rare admission of defeat, Google announced it is shutting down Google Health due to poor adoption by consumers and physicians. The big lesson here is one that applies to many information businesses: You’ve got to understand in excruciating detail the underlying market you serve. Google is great at building gizmos for personal tasks, such as searching or email, but failed to understand the healthcare ecosystem.
The central idea of Google Health was that patients would want to maintain their own health records. That notion runs counter to the fact that healthcare information flows from doctors, who are the both the providers and often intermediaries in patient access to services. Personal health records are critical for billing and reimbursement as well patient care. While patients may want access to their health records, they almost certainly don’t want to maintain those records themselves. Google’s addition of applications to set and track personal health goals apparently wasn’t enough of a
motivator to drive adoption.
Google Health’s failure contrasts with the relative success of Google Scholar. In that project, Google has worked closely with a group of leading academic institutions to understand their needs and to provide critical technology and services for digitizing scholarly works and archival materials. That partnership approach was apparently absent from Google’s healthcare venture.
Google’s failure may show that it functions best as a disrupter. (Think AdWords, Gmail, and Google Voice.) Access to personal health data is more likely to succeed by supporting the existing relationships that a patient has with his or her providers, not by disrupting them. Healthcare data access is more likely to happen because physicians and institutions grasp the benefits of better informed patients and make personal data available, much as banks have pushed online banking.
One critical success factor will be integration of patient data. It’s a problem that exists today at the institutional and professional level. When patients see several physicians, those physicians often do not have access to a patient’s personal health history because of the fragmentation of record-keeping. A personal health record is useful only if it can easily integrate all sources of medical history, including exams, test results, and drugs and other therapies. (Think Quicken integrating information from multiple bank, brokerage, and credit card accounts.) To its credit, Google was trying to solve the integration problem, by having patients maintain their own records. But Google took a bottom-up approach hoping that a groundswell of interest from patients would lead physicians and hospitals to link into the system.
The fact that healthcare is a top-down business in which physicians and institutions call the shots could be good news. Implementation of electronic health records is accelerating among hospitals and physicians, thanks in part to incentives and pressures from the government, which is also forcing the adoption of standards for data interchange. This technology infrastructure, coupled with the natural pressure toward greater consumer access to information, will eventually enable information access to trickle down to consumers.
Let’s face it: Customer support isn’t sexy. No one ever made history by inventing a new type of customer support. But some of our recent work shows that customer support can have an enormous impact on customers – not just their satisfaction but ultimately on their willingness to purchase or renew an information service. In several of our win-loss analyses for clients, the main driver of customer losses was poor support, resulting in either unneeded customer frustration when using the product or lack of usage altogether, despite an obvious need for the product.
Vendor commitment to support is sometimes undermined by our burgeoning self-service world in which products are engineered so that users can purchase and use them with minimal vendor intervention. The need for support is increasingly viewed as a product defect. Vendors push users toward a variety of self-help tools rather than live support. Much of this self-service approach is positive, offering users faster access to solutions and lowering vendors’ support costs.
However, support remains critical because information products are intangible. The content, applications, and services represented by an information product have value only inasmuch as they help a user accomplish a specific set of tasks. A user’s success with a product often depends not just on the inherent strengths of the product itself, but also on the accompanying support that enables a user to get the most out of the product.
Against these two conflicting realities, we see vendors adopting one of two support models:
- The Necessary Evil Model: For many vendors, support is an obligation to be handled as cheaply as possible within acceptable limits. PC hardware manufacturers are notorious for seeking to troubleshoot customer problems quickly and limiting help by categorizing the user’s problem as outside the scope of hardware support. Many information companies also confine their support to relatively low-level operational questions. In our research, one of the fundamental mistakes of support groups is to assume that a quiet customer is a satisfied customer; constant outreach is critical in ensuring that customers are engaged with the product.
- The Value-Added Model: Some information companies, particularly those serving business and professional users, see customer support as an opportunity to enhance their customers’ experience. These vendors typically have a variety of levels of support, enabling users to get consultative advice on how to use the product most effectively. For example, at LexisNexis and WestLaw, high-quality support is integral to the product, and is staffed by lawyers who can help users set up complex searches among the vendors’ many databases. Similarly, FactSet’s customer support group is key to helping its customers use FactSet’s warehouse of databases and development tools to create custom financial analyses. The company has built a $641 million business with a 90% renewal rate using relatively few salespeople but many, customer-focused support people. Another example is BizFilings, which helps new companies with their corporate or LLC formations and filings. In this highly-competitive business, BizFilings has distinguished itself by providing a high level of hand-holding and consultative support alongside of its packaged offerings.
There is no “best” support model. Support must conform to the needs of each product and the customers it serves. Either way, support should be treated as a critical part of every vendor’s strategic plan.
This post is not about LinkedIn, the IPO. It is about LinkedIn, the company, which is a textbook example of what makes a great information company. It has a combination of characteristics that are rarely found together in a single business information company:
- An enviable balance of revenue sources: LinkedIn makes money in three ways: premium subscriptions (21%), hiring solutions (30%), and marketing solutions (49%). Few business information companies have successfully built such robust, diversified revenue streams from both subscriptions and advertising as LinkedIn has.
- Ever-improving profitability: Whatever you may think about LinkedIn’s valuation, with revenues of $243 million (as of year-end 2010) and a 76% compound annual growth rate since 2008, LinkedIn is not a bubble company. Equally important, it has crossed the threshold for covering its fixed expenses and seeing profits accelerate. Although the company may well sacrifice profits in the short-run to invest in growth or new services, it is now positioned to realize the increasing profitability that information companies can enjoy only when they achieve sufficient scale.
- Horizontal yet specialized: Most business information companies serve specific vertical markets (financial services, construction, healthcare, etc.) and/or job functions (traders, nurses, HR managers, etc.). LinkedIn is completely horizontal, cutting across all markets and job functions. That rare position gives it almost unbounded appeal as a ubiquitous business tool. But LinkedIn has also developed a set of specialized applications from which it makes its money: employment services for hiring managers (accounting for half of its revenues), marketing services, and premium subscriptions offering added privileges and functionality.
- Global appeal: Many business information companies have trouble penetrating new countries, either because their content isn’t relevant or their services don’t fit the local business culture. With 50% of its members from outside the US, LinkedIn clearly doesn’t suffer from these issues.
- High value add: LinkedIn makes ordinary information — professional profiles and business contacts — very valuable through aggregation and cross-linking. As particles alone, this information has limited use, but its value explodes when made accessible as an organized collection overlaid with some basic search, browse, and linking functionality.
- Multiple, compelling value propositions: As a horizontal virtual Rolodex, LinkedIn could suffer from trying to be all things to all people. Instead, it has strong appeal as a research and networking tool for specific reasons that suit various types of users: job seekers, salespeople, hiring managers, and many others.
- Riding the network effect: LinkedIn gets more useful as it gains new participants. That’s the simple principle of a network effect. But in practice few companies have the brains or luck to achieve it. Because network effects tend to accelerate, now that LinkedIn has caught the wave, it is leaving competitors in the dust. LinkedIn adds a million new users every 10 days, and with 100 million members and 75 million unique monthly visitors, it has clearly become the place for professionals to do research and connect.
- Embedded in business: Just as “Google” and “Facebook” have become verbs indicating the extent to which they are now embedded in daily life, LinkedIn has become an integral part of the business mating dance. Connecting on LinkedIn has become a standard protocol like exchanging business cards, but without having to meet face to face. Sending a link to one’s profile on LinkedIn is now widely used instead of sending a resume, showing that LnkedIn is well on its way to becoming the professional profile of record. (Too bad “LinkedIn” doesn’t transform well into a verb.)
- Growth without noise: Despite its broad appeal and growth, LinkedIn remains uncluttered in its content, presentation, and community norms. It hasn’t been overwhelmed like Facebook with a proliferation of functionality or the promiscuity of social networks in general. Connecting on LinkedIn remains a simple, but regulated process. LinkedIn remains a civilized place to do business and has so far avoided Yogi Berra’s complaint about a famous restaurant: “Nobody goes there anymore. It’s too crowded.”